Johnson Controls’ Market Position Bolstered As Exide Files For Bankruptcy

Exide Technologies filed for bankruptcy on Monday, June 10, due to unsustainable cost-structures and increased competition, especially from Johnson Controls.

Johnson Controls on the other hand is investing to grow footprint in the emerging markets, build manufacturing capacity for start-stop batteries and expand margins through a lead recycling facility in South Carolina.

Through benefits arising from these strategic investments, the company expects to grow its auto battery sales in double-digits per year through 2017.

Exide Technologies (NASDAQ:XIDE) filed for bankruptcy on Monday, June 10, attributing Wal-Mart‘s (NYSE:WMT) decision to stop buying its products as a reason. [1] This is the second time in about a decade that the battery maker, which employs around 10,000 people, has filed for bankruptcy. In its filings, Exide said that Wal-Mart’s decision to source automotive batteries from its arch rival, Johnson Controls (NYSE:JCI) led to a significant loss in annual revenues. Thus, as the troubled battery maker goes through restructurings over the next many months, Johnson Controls will have an opportunity to bolster its position as a leading automotive battery supplier.

Johnson Controls’ automotive battery segment, which employs around 13,000 people is already the largest global supplier of lead-acid batteries with 36% market share. [2] It is also a leading manufacturer of advanced battery types that include absorbent glass mat (AGM) and Li-ion batteries. In fiscal 2012, the automotive battery segment generated $6 billion of Johnson Controls’ $42 billion revenues. [2] Here, we take a deeper look at the investment strategies that Johnson Controls is employing to grow its battery business.

Johnson Controls generates over 80% of its battery revenues from the relatively slow growing markets of the Americas and Europe, and the remaining from Asia. [3] However, the company is expanding its footprint in the fast growing markets of Asia-Pacific, especially China. Currently, it has three plants in China and it plans to build two more lead-acid manufacturing facilities so as to ramp up its lead-acid manufacturing capacity in the country to 30 million by 2017. [4] In comparison, Johnson Controls had manufactured around 135 million lead-acid batteries worldwide last year. [5] Additionally, the company is investing to increase penetration with regional auto manufacturers and build aftermarket distribution channels in China.

Vertical Integration

In September last year, Johnson Controls opened its battery recycling facility in South Carolina that can recycle up to 14 million auto batteries in a year. [6] The usage of recycled lead in manufacture of new batteries grows margins as well as insulates the company to a large extent from fluctuations in lead prices. The impact from the full ramp up of this facility is expected to boost Johnson Controls’ battery segment results in the second half of fiscal 2013. Thus, investment in such vertical integration will also contribute to growing the company’s profits in the coming years.

Development Of Advanced Battery Technologies

At the same time, Johnson Controls is also investing to increase production capacity of start-stop batteries, which have seen increasing adoption from consumers and original equipment manufacturers, especially in Europe. These batteries power start-stop vehicles, which turn off automatically when the vehicle comes to a rest and restart, when the clutch is engaged or brake is released. The company estimates that the global annual market for new start-stop vehicles will reach 35 million by 2017, and in this time frame over 70% of new cars being built in Europe will be based on this technology. [7] Additionally, the aftermarket for start-stop batteries is also beginning to develop.

Accordingly, Johnson Controls is investing $280 million in Germany to grow its start-stop battery manufacturing capacity in the country to 11 million. It is also investing $140 million in the U.S. and $100 million in China, to grow its annual start-stop manufacturing capacity to 6 million and 2 million, respectively, in these countries. [2] The company is also investing in research to develop Li-ion batteries, targeted at the evolving hybrid and electric vehicle automobile markets.

As a result of these strategic investments and despite the slowdown in Europe, revenues and profits at Johnson Controls’ auto battery segment grew by double-digits in the last quarter. Over the next few years, the company anticipates revenues at its auto-battery segment to grow by 10-15% per year on market share gains, growth from China and increasing adoption of AGM technology. [3] It also anticipates to expand its margins on benefits from vertical integration.

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